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Q1-2012 Earnings Season Outlook, Lowered Expectations (AA, SNDK, CSCO, GE, JPM, WMT, LUV, IBM, T, VZ, BAC, MCD, AAPL)
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Our review focuses on fresh tempering of expectations from Alcoa, Inc. (NYSE: AA), and caution from SanDisk Corporation (NASDAQ: SNDK) and Cisco Systems, Inc. (NASDAQ: CSCO). There are also more very fresh concerns regarding the following companies: General Electric Co. (NYSE: GE); J.P. Morgan Chase & Co. (NYSE: JPM); Wal-Mart Stores Inc. (NYSE: WMT); Southwest Airlines Co. (NYSE: LUV); International Business Machines Corporation (NYSE: IBM); AT&T, Inc. (NYSE: T) and Verizon Communications, Inc. (NYSE: VZ); Bank of America Corporation (NYSE: BAC); and also McDonald’s Corporation (NYSE: MCD).
This is not an effort to move towards the panic button, but it is also full of evidence and inference showing that things might be a bit tempered compared to estimates of even two weeks ago. This tempering may still not kill the expectation that the DJIA will see 14,000 or higher this year.
Alcoa, Inc. (NYSE: AA) has taken a very interesting path here ahead of earnings season. The company is set to report earnings next week and it is generally the first DJIA component to report earnings each quarter. For better or worse, that means that investors try to use Alcoa as a benchmark for all major economic companies each earnings season. The issue goes far beyond Alcoa and far beyond just the base economy companies as one last tempering of earnings expectations for the first quarter of 2012.
While Alcoa is the current focus, we wanted to identify what other DJIA components and/or what other sector leaders have said ahead of earnings season. It may not be as cautious as many investors were braced for at the start of 2012, but it is far from positive and could act as a drag on the expectations that the market will keep rising.
If you tie in what flash memory maker SanDisk Corporation (NASDAQ: SNDK) warned of lower demand and lower pricing hurting sales and margins. With it being the largest independent flash maker, this dimmed the hopes of the tech boom continuing and the drop was in all Apple Inc. (NASDAQ: AAPL) component suppliers. Earlier this week came word from John Chambers of Cisco Systems, Inc. (NASDAQ: CSCO) that government spending was going to get worse before it gets better.
Another concern, which seems to be a lame call rather than an insightful call, came from Moody’s where the credit ratings agency issued a formal downgrade on General Electric Co. (NYSE: GE). We warned when the ‘negative review” came up last month that the call was unwarranted and/or very late because things have gotten better rather than worse. We would only expect that this tempered estimates mildly and the company has done what it can to give the all-clear signal in recent weeks and months.
And what about J.P. Morgan Chase & Co. (NYSE: JPM)? Jamie Dimon has just issued his annual letter to shareholders and it has some warnings in there. We were very disappointed in the dividend hike being too small from the top-rated bank, but maybe Dimon explained this. His letter talked about how earnings could be one-third or so more under a normalized environment and he warned that pesky mortgage-related losses are continuing to drag earnings. Maybe Dimon was acting to temper real earnings expectations for this earnings season.
Back to Alcoa, Inc. (NYSE: AA)… The company just on Thursday announced that it is cutting production to temper an oversupply of alumina. The cut announced is only by about 2% but it is being done so close to earnings that we are taking this as a stance that Alcoa is trying to talk down its guidance yet again. Alcoa will likely still claim that the aluminum market will still double by 2020 but this will only temper expectations for next week’s earnings. The current plans only call for Alcoa’s Atlantic-basin facilities to lighten up on production but specifics were left out. The reaction so far has been muted, but this has to have taken away hope that much upside exists in the guidance.
And there is more elsewhere. Wal-Mart Stores Inc. (NYSE: WMT) threw up its cautionary guidance back in the second-half of February that sales were not going to grow as much as many investors had hoped. Despite a strong stock market in March, Wal-Mart shares are still $2.00 shy of where they were before its report and that means that its big technical breakout may have to wait.
There is still some caution in the airlines. Southwest Airlines Co. (NYSE: LUV) is supposed to have one of the best-run airlines out there with lower labor woes compared to other carriers. It recently warned that the first quarter would likely not show a profit and that surprised most investors. Thomson Reuters now has a target of -$0.05 EPS and that was expected to be positive earnings of $0.04 EPS les than a month ago.
International Business Machines Corporation (NYSE: IBM) has not issued any sort of warning, but its expectations were tempered ahead of Easter after Bank of America/Merrill Lynch cut the rating to Neutral from Buy based in part on valuation and in part on expectations that upside to revenues seemed limited in the current IT-spending environment.
AT&T, Inc. (NYSE: T) and Verizon Communications, Inc. (NYSE: VZ) both saw their earnings upside expectations tempered at the very end of March after R. W. Baird lowered the ratings on both down to Neutral calling the shares pricey. Even S&P Capital IQ took the AT&T rating down to Buy from Strong Buy and RBC lowered its rating on Verizon down to Sector Perform from Outperform.
We already noted J.P. Morgan Chase & Co. (NYSE: JPM), but what about DJIA component Bank of America Corporation (NYSE: BAC)? Its shares have doubled from the late-2012 lows before a recent pullback. Can that performance be expected to continue? It would take a serious upside surprise to drive shares much higher if logic still matters.
One last point was McDonald’s Corporation (NYSE: MCD). The fast food giant tempered its own sales expectations and has announced the retirement of its star-CEO. Just in the last couple of days came word that Goldman Sachs was removing the DJIA’s top performer of 2011 from its prized Conviction Buy List. It appears that there may finally be better value in the company’s competitors.
Before you hit the panic button, perhaps it is time to review the recent trends and the expectations. What has happened is that earnings expectations are being tempered but they are still likely nowhere near as bad as what investors were expecting as recently as January. The market has rallied up until this most recent sell-off and here is an analysis of what happens after a big rally. That is not the same as the caution in corporate profit margins.
And what about Apple Inc. (NASDAQ: AAPL) after the SanDisk warning? All you have to do is look at the endless analyst calls lifting their price target objectives over and over. The news street-high target is $1,001 from an analyst but one fund manager gave an op-ed review showing that Apple could see its shares rise to $1,650 by the end of 2015. Maybe this is just proof that Apple is its own asset class now. Imagine that… Stocks, Bonds, Commodities, Cash, and Apple.
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JON C. OGG
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